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GoPro, Inc. Earnings: The Question Investors Need to Ask

GoPro's earnings were good, but before you buy the stock, ask yourself this critical question.

GoPro investors have a lot riding on these three camcorders. Source: GoPro.

On Thursday, GoPro(NASDAQ:GPRO) reported a fantastic third quarter, defying skeptics and giving shareholders reason to rejoice. Shares of the company popped nearly 15% in Friday's trading session in response to the report.

Investors want to know about the company going forward. Should you jump in to buy shares of the action-camera maker, or should you sit on the sidelines on this investment?

A fantastic quarterOn both revenue and earnings, the company posted solid increases higher than analyst expectations. On the revenue side, the company was expected to report $266 million, but reported $280 million, beating the consensus by 5.3%. The earnings per share beat was even better: The company was widely expected to report $0.08 per share according to analyst consensus -- the company beat that by 50% by reporting EPS of $0.12 versus the loss they reported during last year's corresponding quarter.

However, GoPro's fourth-quarter guidance was, perhaps, the best part of the its third-quarter report. The company stated it expected fourth-quarter revenue to come in between $550 million to $580 million. At the midpoint of $565 million, that's more than 12% higher than analyst consensus.

All in all, it was a great report. GoPro is still more than 20% below its all-time highs of $98.47 per share.

GoPro's scary October seems not to be its faultEven including Friday's huge run-up, GoPro has lost the majority of its lost market capitalization during this month alone. After closing September at close to $94 per share, the company has endured a rather negative news cycle in October.

First was a poorly communicated transfer of 5.8 million shares of stock into CEO Nick Woodman's charitable foundation that many thought was a way to sidestep the lockup period. It ended up not being true; but speculation itself drove shares down nearly 10%.

Following the charity debacle, the stock was hammered once again when a French journalist commented that the brain injury that Michael Schumacher, of Grand Prix fame, incurred while skiing was exacerbated by the GoPro camera mounted on his helmet. Shares endured another near double-digit fall that day. The journalist later recanted those comments.

These missteps appeared to pierce the armor of GoPro, the investment. During the company's short history as a publicly traded company, it seemed infallible as it continued to expand its valuation metrics. Suddenly, the stock ran into a bout of negative news and lost more than $2 billion in value during the month in which the greater S&P 500 closed at record highs.

The question investors must ask: Can you stand volatility?For those looking to start a position in GoPro, that's the question you need to ask. Although the company is growing quickly, the valuation is essentially priced for perfection. By labeling itself a social-media company, GoPro was the beneficiary of higher valuations than most consumer-electronics companies. And while the company continues to grow its social-media network, it still hasn't monetized its content in a meaningful way.

As a consumer-electronics company, GoPro is heavily dependent on its seasonally heavy, holiday-laden fourth quarter. By issuing guidance more than 12% higher than analyst consensus, GoPro raised the bar in regards to its performance. In the event it finds itself unable to perform due to competition, macroeconomics, or consumer choice, it's possible for the stock to experience these huge and volatile swoons in price.

However, GoPro appears to be firing on all cylinders going into this important time with a host of new Hero4 cameras that have been highly rated and well received. One thing's for sure: GoPro, the investment, is as exciting as its product.

Author

Inspired by the idea of "making your money work for you" at a young age, mostly because he was a lazy child, Jamal parlayed that inspiration into a love of the psychology of markets, competitive advantages, and thematic investing. He later shrug off that laziness, with a career that included stints as a mortgage trainer, a financial advisor, a Sr. Investments Communications Specialist, and a stockbroker. Jamal graduated from George Mason University with a bachelors of science in finance, American University with a masters in finance, and is a CFA charterholder.